SECURITIES AND EXCHANGE COMMISSION

FORM 10-QSB

[X] Quarterly Report Under Section 13 or 15(d) of the
Securities Exchange Act of 1934. 
For the quarterly period ended: March 31, 2007

OR

[_] Transition Report Under Section 13 or 15(d) of the
Securities Exchange Act of 1934. 
For the transition period from: to

Commission File Number: 000-030813

AlphaRx, Inc.

|Delaware                            | 98-0177440                              
|----------------------------------- | ----------------------------------------
|(State
    or other jurisdiction of | (I.R.S.
    Employer Identification No.)
|incorporation or organization)      |                                         

168 Konrad Crescent, Suite 200 
Markham, Ontario, Canada L3R 9T9 
(Address of principal executive offices)

Registrant's telephone number, including area code: (905)
479-3245

Securities registered pursuant to Section 12(b) of the Act:
None

Securities registered pursuant to Section 12(g) of the Act:

Common Stock, $.0001 par value 
(Title of Class)

Check whether the issuer (1) filed all reports required to be
filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the
past 12 months (or for such shorter period that the registrant was required to
file such reports), and (2) has been subject to such filing requirements for the
past 90 days. Yes [X] No [ ]

The number of outstanding shares of registrant's Common Stock on May 15, 2007
was 57,808,112.

Transitional Small Business Disclosure Format. Yes [ ] No [X]

---



ALPHARX, INC.

FORM 10-QSB

MARCH 31, 2007



TABLE OF CONTENTS

|Unaudited Interim
    Consolidated Balance Sheets as of March 31                  |   
|--------------------------------------------------------------------------------- | --
|2007 and September 30, 2006                                                       | 3 
|                                                                                  |   
|Unaudited Interim
    Consolidated Statements of Operations for the three and six |   
|months ended March 31, 2007 and 2006                                              | 4 
|                                                                                  |   
|Unaudited Interim
    Consolidated Statements of Changes in Shareholders Deficit | 5 
|                                                                                  |   
|Unaudited Interim
    Consolidated Statements of Cash Flow for the six months     |   
|ended March 31, 2007 and 2006                                                     | 6 
|                                                                                  |   
|Condensed Notes to
    Unaudited Interim Consolidated Financial Statements        | 7 
|                                                                                  |   
|Managements
    Discussion and Analysis of Financial Condition and Plan          |   
|of Operation                                                                      | 12
|                                                                                  |   
|Other Information                                                                 | 18
|                                                                                  |   
|Exhibits 31.2, 31.2,
    32.1, 32.2                                               | 20

2

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ALPHARX, INC.

|                                                                 | March 31, | September 30,
|---------------------------------------------------------------- | --------- | -------------
|                                                                 | 2007      | 2006         
|CURRENT ASSETS                                                   |           |              
|                                                                 |           |              
|Cash
    and Cash Equivalents                                    | $         | 784,942      
|Marketable Securities                                            |           | -            
|Accounts Receivable, net                                         |           | 12,586       
|Prepaid Expenses and
    Other Assets                            |           | 2,449        
|Discontinued Operations (Note 3)                                 |           | 28           
|TOTAL CURRENT ASSETS                                             |           | 800,005      
|                                                                 |           |              
|PROPERTY, PLANT &
    EQUIPMENT, net                             |           | 229,630      
|OTHER ASSETS                                                     |           |              
|Licensing Right                                                  |           | 1            
|TOTAL ASSETS                                                     |           | 1,029,636    
|                                                                 |           |              
|CURRENT LIABILITIES                                              |           |              
|Accounts Payable and Accrued Liabilities                         |           | 495,334      
|Notes Payable (note 4)                                           |           | 1,279,662    
|Discontinued Operations (note 3)                                 |           | 17,065       
|Deferred Revenue                                                 |           | 75,000       
|TOTAL CURRENT LIABILITIES                                        |           | 1,867,061    
|                                                                 |           |              
|MINORITY INTEREST
    (note 5)                                   |           | 130,967      
|                                                                 |           |              
|SHAREHOLDERS
    EQUITY/(DEFICIT)                               |           |              
|Common Stock: $ 0.0001 par value,                                |           |              
|Authorized:
    250,000,000 shares; Issued and outstanding March |           |              
|31,
    2007- 57,808,112 (September 30, 2006-57,508,112) (Notes  |           |              
|6-8)                                                             |           | 5,782        
|Additional paid-in capital                                       |           | 14,629,627   
|Accumulated Other Comprehensive Loss                             |           | (9,147)      
|Deficit                                                          |           | (15,594,654) 
|                                                                 |           |              
|TOTAL SHAREHOLDERS EQUITY/(DEFICIT)                             |           | (968,392)    
|                                                                 |           |              
|TOTAL LIABILITIES AND SHAREHOLDERS                              |           |              
|EQUITY/(DEFICIT)                                                 | $         | 1,029,636    

See condensed notes to consolidated financial statements

3

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ALPHARX, INC. 
CONSOLIDATED STATEMENTS OF OPERATIONS 
FOR THE THREE AND SIX MONTHS ENDED MARCH 31, 2007 AND 2006

|                                   | Three months ended Mar 31 |  | Six months ended Mar 31
|---------------------------------- | ------------------------- |  | -----------------------
|                                   | 2007                      |  | 2006                   
|LICENSE FEES AND ROYALTIES         | 26,365                    |  | 101,910                
|OTHER REVENUES                     | 1,000                     |  | -                      
|TOTAL REVENUES                     | 27,365                    |  | 101,910                
|                                   |                           |  |                        
|GENERAL AND ADMINISTRATIVE         |                           |  |                        
|EXPENSES                           | 130,763                   |  | 87,455                 
|STOCK BASED COMPENSATION           |                           |  |                        
|EXPENSE AND WARRANT                |                           |  |                        
|AMORTIZATION                       | 129,875                   |  | 107,853                
|RESEARCH AND
    DEVELOPMENT       |                           |  |                        
|EXPENSES                           | 221,206                   |  | 453,690                
|SALES AND MARKETING
    EXPENSES   | -                         |  | -                      
|DEPRECIATION                       | 24,664                    |  | 18,154                 
|LOSS FROM OPERATIONS               | (479,143)                 |  | (565,242)              
|                                   |                           |  |                        
|OTHER INCOME AND
    EXPENSES      |                           |  |                        
|                                   |                           |  |                        
|INTEREST (EXPENSE)/INCOME, NET     | (30,000)                  |  | (9,569)                
|                                   |                           |  |                        
|LOSS BEFORE INCOME
    TAXES       | (509,143)                 |  | (574,811)              
|                                   |                           |  |                        
|INCOME TAX                         | -                         |  | -                      
|                                   |                           |  |                        
|LOSS BEFORE MINORITY
    INTEREST  | (509,143)                 |  | (574,811)              
|MINORITY INTEREST                  | 14,281                    |  | -                      
|LOSS BEFORE
    DISCONTINUED       |                           |  |                        
|OPERATIONS                         | (494,862)                 |  | (574,811)              
|(LOSS) GAIN FROM
    OPERATIONS OF |                           |  |                        
|DISCONTINUED COMPONENT (note 4)    | 25,222                    |  | (123,763)              
|NET LOSS                           | (469,640)                 |  | (698,574)              
|CUMULATIVE TRANSLATION             |                           |  |                        
|ADJUSTMENT                         | (5,468)                   |  | -                      
|COMPREHENSIVE LOSS                 | $(475,108)                |  | $ (698,574)            
|                                   |                           |  |                        
|NET
    LOSS PER COMMON SHARE,     |                           |  |                        
|BASIC & DILUTED                    | $(0.01)                   |  | $(0.01)                
|WEIGHTED AVERAGE NUMBER OF         |                           |  |                        
|COMMON SHARES
    OUTSTANDING      | 57,808,112                |  | 57,508,112             

4

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ALPHARX, INC. 
CONSOLIDATED STATEMENTS OF CHANGES IN SHAREHOLDERS EQUITY 
FOR THE PERIOD ENDED MARCH 31, 2007 
(All amounts in US Dollars)Common StockAccumulatedAdditional
    Other
    Com-
    
    TotalNumber
    of
    
    Paid in
    prehensive
    
    ShareholdersShares
    Amount
    Capital
    Loss
    (Deficit)
    Equity(Deficit)Balance, as ofSeptember 30, 2005
    57,508,112
    $5,752
    $12,163,243
    -
    $(12,011,944)
    $157,051Issuance of stockoptions forconsulting services
    
    
    233,838
    
    
    233,838Stock basedcompensation
    
    
    483,279
    
    
    483,279Unamortizedwarrant discount
    
    
    504,495
    
    
    504,495Net Loss for the year
    
    
    
    
    (2,522,293)
    (2,522,293)Subsidiary commonstock issuance
    
    
    1,094,227
    
    
    1,094,227Foreign currencytranslation
    
    
    
    (5,329)
    
    (5,329)Balance, as ofSeptember 30, 2006
    57,508,112
    $5,752
    $14,479,082
    $(5,329)
    $(14,534,237)
    $(54,732)Issuance of stock forconsulting services
    300,000
    30
    29,970
    
    
    30,000Unamortizedwarrant discount
    
    
    104,823
    
    
    104,823Stock basedcompensation
    
    
    15,752
    
    
    15,752Net
    Loss for theperiod
    
    
    
    
    (1,060,417)
    (1,060,417)Foreign currencytranslation
    
    
    
    (3,818)
    
    (3,818)Balance as ofMarch 31, 2007
    57,808,112
    $5,782
    $14,629,627
    $(9,147)
    $(15,594,654)
    $(968,392)See condensed notes to consolidated financial statements5ALPHARX, INC. 
INTERIM CONSOLIDATED STATEMENTS OF CASH FLOWS 
FOR THE SIX MONTHS ENDED MARCH 31, 2007 AND 2006 
(UNAUDITED) (All amounts in US Dollars)Six months
    ended March 31,
    
    2007
    
    2006CASH FLOWS
    FROM OPERATING ACTIVITIESNet Loss
    $
    (1,060,417)
    $
    (1,741,027)Adjustments to reconcile net loss to net cash
    used in operatingactivities:Depreciation and amortization
    
    44,682
    
    33,079Warrant amortization
    
    251,957
    
    -Stock based compensation expense
    
    15,752
    
    496,440Options issued for services rendered
    
    -
    
    111,224Issuance of common stock for services rendered
    
    30,000
    
    -Changes in assets and liabilities:Decrease in marketable securities
    
    176,418
    
    -Increase in accounts receivable
    
    (1,816)
    
    (37,413)Decrease in prepaid expenses
    
    7,057
    
    10,389Increase (Decrease) in accounts payable and
    accrued liabilities
    
    (37,175)
    
    396,987Accrued interest on notes payable
    
    41,865
    
    -Increase in deferred revenue
    
    75,000
    
    -Discontinued operations (Note 3)
    
    (30,707)
    
    90,651NET CASH
    USED IN OPERATING ACTIVITIES
    
    (487,384)
    
    (639,670)CASH FLOWS
    FROM INVESTING ACTIVITIESPurchase of Machinery & Equipment, net of
    disposals
    
    -
    
    793NET CASH
    PROVIDED BY INVESTING ACTIVITIES
    
    -
    
    793CASH FLOWS FROM FINANCING ACTIVITIESMinority Interest
    
    (30,316)
    
    -Discount on issuance of Notes Payable
    
    104,823
    
    456,336Issuance (repayment) of Notes Payable, net
    
    205,517
    
    23,399NET CASH
    PROVIDED BY FINANCING ACTIVITIES
    
    280,024
    
    479,735Effect of
    exchange rate changes on cash and cash equivalents
    
    4,549
    
    -NET DECREASE IN CASH
    
    (202,811)
    
    (159,142)Cash, and cash equivalents, beginning of period
    
    987,753
    
    193,458Cash, and cash equivalents, end of period
    $
    784,942
    $
    34,316Taxes Paid
    $
    0
    $
    0Interest
    Paid
    $
    17,115
    $
    0See condensed notes to consolidated financial statements
6ALPHARX INC. 
CONDENSED NOTES TO INTERIM CONSOLIDATED FINANCIAL STATEMENTS 
MARCH 31, 2007 
(UNAUDITED)

NOTE 1. NOTES TO INTERIM CONSOLIDATED FINANCIAL STATEMENTSThe accompanying unaudited consolidated financial statements
have been prepared in accordance with the instructions to Form 10-QSB and do not
include all the information and footnotes required by generally accepted
accounting principles for complete financial statements. In the opinion of
management, all adjustments (consisting of all recurring accruals) considered
necessary for fair presentation have been included. Operating results for the
interim periods are not necessarily indicative of the results that may be
expected for the year ended September 30, 2007. Interim financial statements
should be read in conjunction with the Companys annual audited financial
statements.
NOTE 2. NATURE OF BUSINESS AND GOING CONCERN
AlphaRx, Inc. (the "Company") was incorporated under the laws
of the State of Delaware on August 7, 1997. The company is an emerging
pharmaceutical company specializing in the formulation of human therapeutic
products using proprietary drug delivery technologies.
Effective June 30, 2006, AlphaRx International Holdings
Limited. ("AIH") acquired 100% of AlphaRx Life Sciences Ltd. ("ALS") for a
nominal amount and the assumption of approximately $63,000 of related party
liabilities. ALS is involved in obtaining necessary regulatory approvals for the
manufacture and distribution of the Companys products in the Asian market.
Effective June 22, 2006, New Super Limited, an independent
Hong Kong based corporation, subscribed for 1,500 shares of common stock of
AlphaRx International Holdings Ltd.("AIH"), previously a wholly-owned subsidiary
of the Company.
The consolidated financial statements reflect the activities
of the Company, 100% of AlphaRx Canada Limited and 85% of AlphaRx International
Holdings Limited and AlphaRx Life Sciences Ltd. (AIHs wholly owned subsidiary).
All material inter-company accounts and transactions have been eliminated.
The accompanying consolidated financial statements have been
prepared on a going concern basis, which contemplates the realization of assets
and the satisfaction of liabilities in the normal course of business.
Accordingly, they do not include any adjustments relating to the realization of
the carrying value of assets or the amounts and classification of liabilities
that might be necessary should the Company be unable to continue as a going
concern. Continuance of the Company as a going concern is dependent on its
future profitability and on the on-going support of its shareholders, affiliates
and creditors.
NOTE 3. DISCONTINUED OPERATIONS

The Company terminated direct sales and marketing program for
Flexogan during the year ended September 30, 2006. Substantially more funding
for sales and marketing would be required than was available in order to grow
sales. Accordingly direct sales and marketing activity ceased. The statements of
income and loss and balance sheet items related to the discontinued operations
are as follows:
7

INCOME STATEMENTS FOR THREE AND SIX
    MONTHS ENDED MARCH 31, 2007 AND 2006Three Months
    
Three Months
    
Six months
    
Six monthsMarch 31
2007
    2006
    2007
    2006Sales
    $ 1,028
    $ 5,465
    $ 1,905
    $ 22,003Cost of Sales
    -
    1,483
    -
    8,919Gross Margin
    1,028
    3,982
    1,905
    13,084General and Administrative
    (24,194)
    100,375
    (15,544)
    114,720Sales and Marketing
    -
    27,370
    734
    32,845Profit(Loss) on discontinued
    operations
    $ 25,222
    $ (123,763)
    $ 16,715
    $ (134,481)BALANCE SHEETS AS AT
    
    
    March 31,
    2007
    September
    30, 2006Other assets
    
    
    $ 28
    $ 4,474Total Current Assets
    
    
    28
    4,474Accounts Payable and AccruedLiabilities
    
    
    17,065
    52,218Total Current Liabilities
    
    
    17,065
    52,218Net Assets (Liabilities)
    
    
    $ (17,037)
    $ (47,744)NOTE 4. NOTES PAYABLE

The Company issued $310,340 in promissory notes with attached
warrants during the six months ended March 31, 2007. These notes bear interest
at 12% per annum and are repayable on the first anniversary of the date of
issuance. Prepayment of these notes prior to the first anniversary date is
permitted. The attached warrants required a discount to be established in the
amount of $104,823. This discount is being amortized over the term of the
promissory notes.
AlphaRx Life Sciences Ltd. (an indirect 85% subsidiary of the
Company) also repaid promissory notes owing in the amount of $52,928 (including
$17,115 in accrued interest) from funds available in that subsidiary.
Promissory Notes Issued:
    $1,278,105Discount on Promissory
    Notes:
    (609,318)Interest Accrued
    107,198Discount Amortized:
    503,677Promissory Notes
    PayableDecember 31, 2006:
    $1,279,662There remains $105,641 in discount to be amortized over the
life of the promissory notes.
We have extended the repayment of approximately $391,000 of
promissory notes including accrued interest for an indeterminate amount of time.
Interest continues to accrue on the principal amount at 12% per annum. See also
note 9  Related Party Transactions.
NOTE 5. MINORITY INTEREST

Effective June 22, 2006, AlphaRx International Holdings Ltd.
("AIH") issued 1,500 shares of its common stock to New Super Limited ("NSL") at
a price of approximately $HK 6,667 per share or $HK 10 million in cash. (USD
$1,288,826). There are now 10,000 common shares outstanding of which 8,500 or
85% belong to the Company. Prior to the
transaction the Company owned 100% of AIH. With the consolidation of only 85% of
AIH, a minority interest was established, representing net amounts owing to the
minority shareholder. The capital infusion into AIH is accounted for as
additional paid in capital on the consolidated financial statements of the
Company.
8
NOTE 6. COMMON STOCK
The Company is authorized to issue 250,000,000 shares of
common stock. As of March 31, 2007, there remains issued and outstanding
57,808,112 shares of such common stock which has a stated par value of $0.0001
per share.
There were 300,000 shares issued of restricted common stock
during the three months ended December 31, 2006 in exchange for financial
consulting services rendered in the amount of $30,000. There were no shares
issued in the three months ended March 31, 2007. (No shares were issued during
six months ended March 31, 2006).
NOTE 7. STOCK OPTION PLANS

The Company has a Stock Option Plan (the "Plan") under which
officers, key employees, certain independent contractors, and non-employee
directors may be granted options to purchase shares of the Companys authorized
but unissued common stock. A majority of shareholders approved the 2006 Option
Plan at the Annual General Meeting held March 29, 2006. Under this Plan up to
5,000,000 options may be granted. As of March 31, 2007 we have granted 90,000
options under the 2006 Option Plan. As each Plan exhausted the options available
for granting, a successor Plan was established. Outstanding stock options
granted under the old Plans will remain in effect until the expiration date
specified in those options. Options currently expire no later than 10 years from
the grant date and generally vest within five years. Proceeds received by the
Company from exercises of stock options are credited to common stock and
additional paid-in capital. Additional information with respect to the various
Plans stock option activity is as follows:
2001 Plan
    (succeeded by 2003 Plan)
    Number of
    Shares
    
    Weighted
    Average
    Exercise
    PriceOptions outstanding and exercisable at March
    1,150,000
    
    $0.1031, 20072003
    Plan (succeeded by 2004 Plan)
    Number of
    
    WeightedShares
    
    AverageExercisePriceOutstanding at February 10, 2003
    0Granted during fiscal
    2003
    645,000
    
    $0.63Exercised
    0
    
    $0.00Cancelled
    75,000
    
    $0.63Options outstanding and exercisable atMarch 31, 2007
    570,000
    
    $0.632004
    Plan (succeeded by 2006 Plan)
    Number of
    
    WeightedShares
    
    AverageExercisePriceOutstanding at July 24, 2004
    09
Granted during fiscal
    2004
    0Granted during fiscal 2005
    20,710,000
    
    $0.16Granted during fiscal
    2006
    3,290,000
    
    $0.075Granted during fiscal 2007
    0Exercised/Cancelled
    0Options outstanding and exercisable at March31, 2007
    24,000,000
    
    $0.157Additional information with respect to the 2004 Plans stock option activity
is as follows:
Grant Date
    Quantity
    Granted
    Option
    Price
    Expiry
    Fair Value
    Risk
    Free
    Rate
    Expected
    Life
    Expected
    Volatility
    Expected
    DividendNov 15,
    2004
    13,220,000
    $0.15
    to
    $0.50
    Nov 15,
    2014
    $1,448,922
    2.32%
    10
    years
    185%
    NILJan 10,
    2005
    7,000,000
    $0.15
    Feb 8,
    2015
    $1,045,056
    2.02%
    10
    years
    177%
    NILFeb 8,
    2005
    390,000
    $0.15
    Feb 8,
    2015
    $53,894
    1.93%
    10
    years
    156%
    NILMay 25,
    2005
    100,000
    $0.13
    May 25,
    2015
    $7,627
    2.00%
    10
    years
    70%
    NILOct 17,
    2005
    3,290,000
    $0.075
    Oct 17,
    2015
    $244,559
    4.50 %
    10
    years
    75%
    NIL24,000,000
    
    $2,800,058
2006 Plan
    Number of
    
    WeightedShares
    
    AverageExercisePriceOutstanding at September 30, 2006
    0Granted during fiscal
    2007
    90,000
    
    $0.10Exercised/Cancelled
    0
    
    $0.00Options outstanding at
    March 31, 2007
    90,000
    
    $0.10Options exercisable at March 31, 2007
    0
The Company has adopted the fair value accounting for
employee stock options as per SFAS 123(R) using the modified retrospective
application method, effective April 1, 2005. The Company recorded $15,752 in
stock based compensation expense during the six months ended March 31, 2007
($496,440 for the six months ended March 31, 2006). The Black-Scholes option
pricing model was used to calculate this expense. There are no further stock
based compensation expenses to be recorded under the completed Option Plans.
NOTE 8. WARRANTS

The Company has the following warrants outstanding to
purchase common stock at March 31, 2007:
10
Warrants issued in conjunction with financing
    costs whereby onewarrant entitles the holder to purchase one share
    of common stockat an exercise price of $1.10, expiring December
    19, 2007.
    670,275Warrants issued in return for financial advisory
    services wherebyone warrant entitles the holder to purchase one
    share of commonstock at an exercise price of $0.05, expiring
    September 1, 2007.This warrant can only be exercised after January
    29, 2005.
    3,000,000Warrants issued in conjunction with financing
    costs whereby onewarrant entitles the holder to purchase one share
    of common stockat an exercise price of $0.15, expiring September
    1, 2007.
    2,994,642Warrants issued in conjunction with financing
    costs whereby onewarrant entitles the holder to purchase one share
    of common stockat an exercise price of $0.30, expiring September
    1, 2007.
    2,287,669Warrants issued in conjunction with conversion of
    promissorynotes and in conjunction with the private
    placement completedduring July and September 2004. One warrant
    entitles the holderto purchase one share of common stock at an
    exercise price of$0.30. Expiry dates: July 21, 2007  27,505,378;
    September 1,2007  12,426,114; October 13, 2007  5,204,160.
    45,135,652Warrants issued in conjunction with the issuance
    of PromissoryNotes during fiscal 2006. One warrant entitles
    the holder topurchase one share of common stock at an exercise
    price of $0.10,expiring February 13 and September 30, 2008.
    5,524,453Warrants issued in conjunction with the issuance
    of PromissoryNotes during December 2006. One warrant entitles
    the holder topurchase one share of common stock at an exercise
    price of $0.10,expiring December 31, 2008
    1,500,000Warrants issued in conjunction with the issuance
    of PromissoryNotes during March 2007. One warrant entitles the
    holder topurchase one share of common stock at an exercise
    price of $0.10,expiring March 31, 2009
    807,775Total Warrants Outstanding
    61,920,466NOTE 9: RELATED PARTY TRANSACTIONS

The Company sources some of its funding in the form of
promissory notes from directors. The directors loaned the Company approximately
$32,200 during the six months ended March 31, 2007 ($149,835 during the six
months ended March 31, 2006). Total loans outstanding to directors as of March
31, 2007 were approximately $347,720 including accrued interest of approximately
$35,761. These loans bear interest at 12% per annum and are unsecured.
NOTE 10: RECLASSIFICATIONS

Certain amounts in prior years financial statements have
been reclassified to conform to current year presentation. In particular amounts
related to discontinued operations have been reclassified for comparison
purposes.
11ITEM 2: MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND PLAN OF OPERATIONThe following discussion and analysis should be read in
conjunction with the Financial Statements, including the condensed Notes
thereto, appearing in this Form 10-QSB. For additional information and complete
financial statement note disclosure as of September 30, 2006, reference should
be made to the annual Form 10KSB filed during December, 2006 and the amended
Form 10KSB/A filed during March, 2007. Except for the historical information
contained herein the foregoing discussion contains forward-looking statements
that involve risks and uncertainties. Our actual results could differ materially
from those projected in the forward-looking statements discussed herein.
General

AlphaRx is a drug delivery company specializing in the
development of innovative human therapeutic products for the pharmaceutical and
consumer health care market. Our core competence is in the development of novel
drug formulations for therapeutic molecules or compounds that have exhibited
poor gastro intestinal absorption due to poor solubility or have yet be
administerable to the human body with an acceptable delivery method. Our drug
delivery system is versatile and offers significant flexibility in the
development of suitable dosage formulations (i.e. oral, topical or parenteral)
to meet the requirements of specific drug molecules. We are no longer pursuing
direct marketing and sales of our market ready products, nor do we intend to
pursue direct marketing and commercialization of any newly developed products.
The absence of marketing expertise, and significant ongoing funding required to
introduce and promote a product successfully into the market are the principal
factors limiting our ability to directly market our proprietary products. We are
and will continue to seek out established collaborative partners, distributors
and licensees to commercialize and market our products in exchange for milestone
payments and royalties.
The costs incurred for individual research and development
initiatives to date cannot be readily determined because (i) there is no clear
distinction between initiatives in order to be able to differentiate between
them; (ii) all initiatives have a common goal and that is to adopt our
Bioadhesive Colloidal Dispersion drug delivery system to the specific drug in
order to improve that drugs effectiveness; and (iii) we do not maintain a time
control system to separately classify research and development activities
between similar initiatives.
The nature, timing and estimated costs to complete a research
and development initiative and anticipated completion dates cannot be estimated
because: (i) the nature of research is experimental and we could encounter
unforeseen situations which could significantly delay project completion or
require us to abandon the project; (ii) timing to complete a research initiative
depends, to a certain extent, on financial resources and we cannot predict with
any degree of certainty that financial resources will be available when needed
to complete any specific initiative; (iii) we cannot significantly influence our
partners and licensees as to timing and completion of collaborative efforts, and
(iv) cost estimates cannot be predicted with any acceptable degree of accuracy
due to unforeseen issues arising during the clinical stages or the approval
stages of any specific initiative.
If we cannot complete our research and development
initiatives on a timely basis consequences to our operations could be
significant to the point where the initiative would be delayed or even
abandoned. We could also face the risk of competitors developing the same or
similar products and being first to market. Finally, our failure to develop
products on a timely basis could substantially impair our ability to generate
revenues and materially harm our financial position.
We cannot predict the timing of material net cash inflows
(royalty and milestone payments) from our collaborative partners due to a number
of factors including (i) lack of control over the commercialization and
marketing process; (ii) our lack of historical experience with our partners; and
(iii) competitors products and the nature and timing of their marketing
initiatives. As we no longer market and sell our products directly we do not
anticipate any cash inflows from direct sales.

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We intend to continue investing in the further development of
our drug delivery technologies and to actively seek collaborators and licensees
to accelerate the development and commercialization of products incorporating
our drug delivery systems. Depending upon a variety of factors, including
collaborative arrangements, available personnel and financial resources, we will
conduct or fund clinical trials on such products and will undertake the
associated regulatory activities.

Recent Developments

Together with our licensee Proprius Pharmaceuticals Inc. ("Proprius"),
we completed Phase II clinical trials for Indaflex in March, 2007. The
randomized double-blind placebo and vehicle controlled trial, which included a
six week treatment period, was conducted on 233 patients with osteoarthritis of
the knee. While the trial did not meet its primary endpoints, subgroup analyses
of patients with moderate to severe pain and more impaired physical function at
baseline showed positive trends in patients treated with Indaflex as compared to
patients treated with either placebo or vehicle. Indaflex was demonstrated to be
safe and well tolerated. Under the terms of the Licensing Agreement with
Proprius we may not receive any milestone payments for this trial. Proprius
retained the rights to clinical development and commercialization of Indaflex in
April 2006 in exchange for an initial license fee and future milestone and
royalty payments. Future milestone and royalty payments are based on successful
completion of trials and commercialization of Indaflex. Proprius is solely
responsible for the global commercialization (with the exception of Asia and
Mexico) of Indaflex.

Our 85% owned subsidiary AlphaRx International Holdings
Ltd.("AIH"), through its wholly-owned subsidiary AlphaRx Life Sciences Ltd. has
commenced several research initiatives in Beijing, and in Moscow. Research
initiatives have commenced with Streptomycin for Tuberculosis, Levoflaxicin for
infection and we are continuing our research with Doxorubicin to address hepatic
cancer. Reduced costs and labour rates in China as compared to North America
allows us to expand research and development activities more efficiently even
when taking increased travel into account.

Preclinical research continues in Canada on Vansolin 
sepsis, Zysolin  pneumonia and sepsis, and Ocusolin  ocular infection. We have
concluded our formulation activities on three products for a global
pharmaceutical company based in the U.S. The adoption or rejection of our
formulations will not be determined until after our fiscal year end in
September, 2007.

In June, 2006 AIH issued 1,500 shares of its common stock to
New Super Limited ("NSL") in accordance with an agreement concluded during
April, 2006. The shares were issued for total cash consideration of $HK 10
million (USD $1,288,826). These funds are being utilized for research and
development initiatives in China and in Russia and also, to a certain extent in
Canada. There are presently 10,000 shares of common stock issued and
outstanding, of which 85% are owned by us. In accordance with SAB No. 51, we
have accounted for the issuance of our subsidiarys stock as a capital
transaction.

On May 1, 2006 we announced that AIH has entered into an
agreement with China Lianyungang City Golden Enterprises Limited ("China Party")
to establish a Joint Venture in mainland China. The Joint Venture intends to
establish a manufacturing facility in Lianyungang City, Jiangsu Province and a
distribution network in order to manufacture and market pharmaceutical products
licensed by AIH. In addition AIH will help to develop branded generic products
in lieu of capital payment into the Joint Venture. China Party has agreed to
inject working capital of RMB 250 million (approximately $31 million) into the
Joint Venture in the form of equity. AIH will own 30% of the Joint Venture
common stock and China Party will own 70%. AIH is also to receive a 5% royalty
on all AIH licensed product sales generated by the Joint Venture. Delays are
being experienced in obtaining the appropriate operating licenses, and permits
from the government in order to commence building construction.

We signed a licensing agreement with Industria Farmaceutica
Andromaco, S.A. de C.V. ("Andromaco") in August 2003 for the commercialization
of our lead pharmaceutical product "Indaflex" in Mexico. Mexican
health
authorities gave approval to Andromaco to start sales of Indaflex in Mexico. We
collected our first royalties from Indaflex sales in the year ended September
30, 2005. Royalties continue to flow into the Company based on sales generated
in Mexico by Andromaco.

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We established a wholly-owned subsidiary  AlphaRx
International Holdings Limited ("AIH") in April, 2005 and entered into a Joint
Venture Agreement with Basin Industrial Limited (a wholly-owned subsidiary of
Advance Pharmaceutical Co. Ltd.). The joint venture  AlphaAP Inc., is involved
in the manufacture and marketing of certain of the Companys existing products
in the Asia region. Sales have commenced and we are anticipating receipt of our
initial royalties prior to the end of our fiscal year  September, 2007. Until
we receive cash royalties we will not recognize revenues for this joint venture.

RESULTS OF OPERATIONS FOR THE SIX MONTHS ENDED MARCH 31,
2007, AS COMPARED TO THE SIX MONTHS ENDED MARCH 31, 2006

We incurred a net loss before discontinued operations of
$1,077,132 for the six month period ended March 31, 2007 as compared to a net
loss before discontinued operations of $1,606,546 incurred for the same period a
year ago, a decrease of $529,414 or approximately 33%. The decrease stems
primarily from a decrease in stock based compensation expense and warrant
amortization of about $340,000 and a decrease in research and development
expenses of about $340,000.

Revenues

Revenues represent royalties earned from Andromaco based on
sales of Indaflex in Mexico. Total revenues for the six months ended March 31,
2007 were $38,694 as compared to $107,184 generated for the same period a year
ago, an decrease of $68,490. Excluding the $100,000 in license fees collected
during the six month period ended March 31, 2006, we have increased our royalty
revenues from $7,184 for the six months ended March 31, 2006 to $37,694 in the
six months ended March 31, 2006.

General and Administrative Expenses

General and Administrative expenses consist primarily of
personnel costs related to general management functions, finance, office
overheads, as well as insurance costs and professional fees related to legal,
audit and tax matters. General and Administrative expenses for the six month
period ended March 31, 2007 were $308,034 as compared to $254,593 incurred for
the same period a year ago, an increase of $53,441 or approximately 21%. We
incurred $93,240 in general and administrative expenses in our 85% owned
subsidiary AlphaRx Life Sciences Ltd. during the six month period ended March
31, 2007 with no comparable expense in the same period a year ago. During the
six month period ended March 31, 2006 we incurred $30,000 in financial
consulting expenses and $31,181 for insurance including Phase II clinical trial
insurance. During the six month period ended March 31, 2007 we incurred no
comparable financial consulting expenses and $8,260 in insurance expense  a
combined reduction of $52,921 in general and administrative expenses. Insurance
expenses decreased based on our agreement with Proprius Pharmaceuticals Inc.
whereby Proprius absorbs all Phase II clinical trial expenses related to
Indaflex effective April, 2006.

Stock Based Compensation Expense and Warrant Amortization

Based on the magnitude of this expense we have disclosed
these items separately from other general and administrative expenses. We
expensed $15,752 in stock based compensation and $251,957 in warrant
amortization during the six months ended March 31, 2007 for a total of $267,709
in this expense category. This compares to $594,503 in stock based compensation
expense and $13,161 in warrant amortization during the same period a year ago.
Stock based compensation expense has decreased as all options issued previously
are now fully vested and all related stock based compensation expense has been
recognized. Any new options issued will attract further stock based compensation
expense.

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We also issued warrants during the six months ended March 31,
2007 in conjunction with the issuance of promissory notes. This, in turn,
required a discount to be established and to be amortized over the life of the
promissory notes. We amortized $251,957 of the discount during the six months
ended March 31, 2007 as compared to $13,161 during the same period a year ago.
The increase stems from the increased issuance of promissory notes and the
cumulative effect of discount amortization over the life of the promissory
notes. There remains $105,641 in unamortized discount to be expensed as at March
31, 2007.

Research and Development Expenses

Research and development expenses include costs for
scientific personnel, supplies, equipment, outsourced clinical and other
research activities.

Research and development expenses for the six months ended
March 31, 2007 were $467,224 as compared to $807,415 incurred for the same
period a year ago, a decrease of $340,191 or about 42%. Proprius Pharmaceuticals
Inc., in accordance with our agreement, absorbed all Phase II Indaflex clinical
trial expenses effective April 2006. Partially offsetting the reduction of
research and development expenses in North America, was the commencement of
research and development initiatives in China and Russia via our indirect 85%
owned subsidiary  AlphaRx Life Sciences Ltd. ("ALS"). We incurred about
$116,700 in research and development in ALS for the six month period ended March
31, 2007 with no comparable expense in the same period a year ago.

Sales and Marketing

Sales and marketing expenses for the six months ended March
31, 2007 totalled $3,750 with no comparable expense in the same period a year
ago. We have one part time marketing consultant based in the U.S. responsible
for sourcing marketing partners and distributors for our market ready products.

Depreciation

Depreciation totalled $44,682 for the six months ended March
31, 2007 as compared to $33,079 incurred during the same period a year ago, an
increase of $11,603 or about 35%. The increase stems from additional capital
expenditures incurred during 2006, which are now being depreciated at maximum
depreciation rates as compared to one half of the maximum depreciation rate in
the year of acquisition.

Loss from Operations

Loss from operations were $1,052,705 for the six months ended
March 31, 2007 as compared to a loss of $1,595,567 incurred for the same period
a year ago, a decrease of $542,862 or approximately 34%. Reduced stock based
compensation and warrant amortization expense, and a reduction in research and
development expenses as explained above, were primarily responsible for the
reduced loss.

Interest Expense

Interest expense for the six months ended March 31, 2007 was
$54,743 as compared to net interest expense of $10,979 generated during the same
period a year ago. The increase in promissory notes from about $469,000 (before
discount) as at March 31, 2006 to approximately $1,278,000 as at March 31, 2007
has caused the increase in interest expense.

Minority Interest

We reflected minority interest of $30,316 for the six months
ended March 31, 2007, representing our minority shareholders proportionate
interest in our 85% owned subsidiary  AIH. The minority interest resulted based
on the investment in our subsidiary AlphaRx International Holdings Ltd. by an
independent third party  New Super Ltd. during June 2006. Previous to this
investment we owned 100% of AIH.

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LIQUIDITY AND CAPITAL RESOURCES

As at March 31, 2007 the Company had working capital
deficiency of $(1,067,056) as compared to a working capital deficiency of
$(176,129) as at September 30, 2006. The Company also has a shareholders
deficiency of $(968,392) as at March 31, 2007 as compared to a shareholders
deficiency of $(54,732) as at September 30, 2006. We issued approximately
$310,000 in promissory notes with attached warrants during the six months ended
March 31, 2007 before discount of about $105,000. We intend to continue to issue
such promissory notes until we can source more permanent funding or until cash
flows improve. These notes are repayable within one year and bear interest at
12% per annum. To maintain our cash position, we have extended the repayment of
promissory notes due in the amount of about $391,000 for an indeterminate period
of time.

We have a licensing arrangement with Andromaco which provides
us with a small royalty stream. We have received a non-refundable deposit of
$75,000 from a U.S. based pharmaceutical company to formulate new products which
may or may not be accepted for commercialization. We also have licensing
arrangements with Proprius Pharmaceuticals Inc. and a joint venture agreement
with AlphaAP Inc. which may provide us with milestone payments and/or royalty
streams in the future. There is no assurance that such payments or royalty
streams will materialize.

Since inception, we have financed operations principally from
the sale of Common Stock and issuance of promissory notes and expect to continue
this practice to fund our ongoing activities.

We currently do not have sufficient resources to complete the
commercialization of any of our proposed products or to carry out our entire
business strategy. Therefore, we will likely need to raise substantial
additional capital to fund our operations in the future. We cannot be certain
that any financing will be available when needed on acceptable terms or at all.
Any additional equity financings will be dilutive to our existing shareholders,
and debt financing, if available, may require additional stock to be issued
and/or involve restrictive covenants on our business.

We expect to continue to spend capital on:

1. research and development programs;
2. preclinical studies and clinical trials;
3. regulatory processes; and
4. third party licensees and distribution partners to
  manufacture and market our products for us.

The amount of capital we may need will depend on many
factors, including:

1. the progress, timing and scope of our research and
  development programs;
2. the progress, timing and scope of our preclinical studies
  and clinical trials;
3. the time and cost necessary to obtain regulatory approvals;
4. the time and cost necessary to establish or to retain sales
  and marketing partners to market our products;
5. the time and cost necessary to respond to technological and
  market developments; and
6. new collaborative, licensing and other commercial
  relationships that we may establish.

The inability to raise capital would have a material adverse
effect on the Company. We currently have no capital commitments other than the
payment of rent on our facilities lease, and for certain research equipment.

CERTAIN FACTORS THAT MAY AFFECT FUTURE RESULTS

Certain of the information contained in this document
constitutes "forward-looking statements", including but not limited to those
with respect to the future revenues, our development strategy, involve known and
unknown risks, uncertainties, and other factors which may cause our actual
results, performance or achievements to be materially different from any future
results, performance or achievements expressed or implied by
such forward-looking statements.

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Such factors include, among others, the risks and
uncertainties associated with a drug delivery company which has not successfully
commercialized our first product, including a history of net losses, unproven
technology, lack of manufacturing experience, current and potential competitors
with significant technical and marketing resources, need for future capital and
dependence on collaborative partners and on key personnel. Additionally, we are
subject to the risks and uncertainties associated with all drug delivery
companies, including compliance with government regulations and the possibility
of patent infringement litigation, as well as those factors disclosed in our
documents filed from time to time with the United States Securities and Exchange
Commission.

ITEM 3. CONTROLS AND PROCEDURES

Evaluation of Disclosure Controls and Procedures.

The Company's management, with the participation of the
Company's Chief Executive Officer and Chief Financial Officer and Principal
Accounting Officer, has evaluated the effectiveness of the Company's disclosure
controls and procedures as of December 31, 2006. The Company's Chief Executive
Officer and Chief Financial Officer and Principal Accounting Officer concluded
that the Company's disclosure controls and procedures are effective for
gathering, analyzing and disclosing the information the Company is required to
disclose in the reports it files under the Securities Exchange Act of 1934,
within the time periods specified in the SEC's rules and forms.

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PART II: OTHER INFORMATION

ITEM 1 - LEGAL PROCEEDINGS

There are currently no legal proceedings against the Company
or any of its subsidiaries.

ITEM 2 - CHANGES IN SECURITIES AND SMALL BUSINESS ISSUER
PURCHASES OF EQUITY SECURITIES

We issued 300,000 shares of common stock in lieu of cash
payments of $30,000 for financial consulting services during the six months
ending March 31, 2007. (Nil for the six months ended March 31, 2006). We also
issued 2,307,775 warrants in conjunction with the promissory notes issued during
the six months ended March 31, 2007. (4,759,453 during the six months ended
March 31, 2006). These warrants entitle the holder to purchase common stock at
$0.10 per share and expire two years from the date of issuance.

ITEM 3 - DEFAULTS UPON SENIOR SECURITIES

N/A

ITEM 4 - OTHER INFORMATION

None.

ITEM 5 - EXHIBITS AND REPORTS ON FORM 8-K

(i) EXHIBITS.

31.1  Certification of C.E.O. Pursuant to Section 302 of
the Sarbanes-Oxley Act of 2002.31.2  Certification of C.F.O. Pursuant to Section 302 of the Sarbanes-Oxley
Act of 2002. 32.1  Certification of Michael Lee pursuant to Section 1350 of Chapter 63
of Title 18 United States Code. 32.2  Certification of Marcel Urbanc pursuant to Section 1350 of Chapter 63
of Title 18 United States Code.

(ii) REPORTS ON FORM 8-K

(a)On November 6, 2006, we filed an 8K reporting on a Feasibility and Option
Agreement with a global pharmaceutical company based in U.S.

Under the agreement, we granted them an exclusive option to
acquire an exclusive worldwide license to our nanoparticle delivery systems for
the development, manufacture and commercialization of certain products in
certain indications. In return, they agreed to pay us an upfront fee, as well as
additional payments upon the achievement of specified milestones and royalty
payments from future product sales that utilize our delivery systems. They will
have the sole responsibility for obtaining all regulatory approvals necessary
for commercialization of these products at their own expense.

(b)   On December 27, 2006 we filed an 8K
summarizing our fiscal 2006 year end results. This was filed in conjunction with
the filing of our annual Form 10KSB.

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SIGNATURES:

Pursuant to the requirements of the Securities Exchange Act
of 1934, the registrant has duly caused this report to be signed on its behalf
by the undersigned, thereunto duly authorized.

DATED: May 15, 2007

| | ALPHARx, INC.                              
| | -------------------------------------------
| |                                            
| | By: __/S/ Michael
    M. Lee               
| | Michael M. Lee, Chief
    Executive Officer
| |                                            
| |                                            
| |                                            
| | Directors:                                 
| |                                            
| | By: __/S/ Michael
    M. Lee               
| | Michael M. Lee,
    Director               
| |                                            
| |                                            
| | By: __/S/ David
    Milroy                 
| | David Milroy, Director                     
| |                                            
| |                                            
| | By: __/S/ Ford
    Moore                   
| | Ford Moore, Director                       
|

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